Commercial landlords and tenants who use property consultants to negotiate on their behalf, those who may deal with such parties and property consultants themselves will find a recent judgment of the Court of Appeal of particular interest.

The case, Pascoe Properties Ltd v Attorney-General [2014] NZCA 616, concerns a renewal of lease by the Ministry of Economic Development. The Ministry used a property consultant to handle its leasing matters and argued that it was not bound by the consultant’s negotiations.

There are two key lessons arising from the case. The first relates to whether the Ministry was bound by the consultant’s negotiations. The second lesson relates to what is required to effect a renewal of lease.We look at these two key points in turn. First, however, we give a brief rundown of the key facts.

Background facts

The Ministry leased 2 floors in a commercial building in Lower Hutt. The lease was for an initial term of 3 years from 1 August 2003 and contained 2 rights of renewal of 3 years each.

The renewal mechanism was standard in providing for the exercise of the right of renewal by written notice by the tenant to the landlord at least 3 months before the end of the term.

Verbal discussions regarding the renewal of 1 August 2006 began between the Ministry’s property consultant (a Mr Benjamin (‘Consultant’)) and the landlord in early October 2005. These included exchanges regarding remedial building works which the Ministry wanted addressed before it would consider exercising its right of renewal.

The Consultant sent the landlord a letter on 20 February 2006 relating to the renewal of lease and the work to be done before that could happen. The landlord added some handwritten comments to that letter regarding the work and the countersigned the letter on 10 March 2006. Two months later (9 May 2006) the Consultant’s office wrote to the landlord acknowledging receipt of the countersigned letter. It referred to there being an ‘agreed basis’ for the Ministry ‘exercising its right of renewal’ and asking the landlord to forward a variation of lease (incorporating the comments) for execution. The landlord argued that there was a concluded binding agreement to renew the lease at this point. The Ministry disagreed. It argued that the negotiations were subject to ratification by the Ministry, that the renewal had not been ratified and that it was accordingly occupying the premises on a monthly tenancy basis only.

Was the Ministry bound by the Consultant’s negotiations?

A party can be bound by the actions of another if it has, by words or conduct, represented (or permitted to be represented) that that other person has authority to act on its behalf (even if they do not have actual authority). This is known as the doctrine of ostensible (or apparent) authority. In considering whether the Consultant had ostensible authority to bind the Ministry, the Court examined the dealings between the parties leading up to the renewal negotiations and the following points:

Internal Ministry email communications made it clear (within the Ministry) that the Consultant had authority to negotiate property matters but not to sign legally binding documents relating to property.

The landlord had dealt almost exclusively with the Consultant. It was not aware of any of the internal Ministry correspondence, but a senior employee of the Ministry had indicated that it should deal with the Consultant regarding the renewal of lease.

The Ministry had put the Consultant in a position where he could negotiate lease issues and send important notices as the Ministry’s duly authorised agent.

When communicating with the landlord, the Consultant had used words such as ‘we’ and ‘our’ (including ‘our right of renewal’) indicating that he and the Ministry were one and the same in terms of their dealings.

The Consultant kept the Ministry copied into his correspondence with the landlord and the Ministry failed to take steps to make it clear that he could not bind it.

The Court also took into account the fact that renewals of lease are usually initiated by a simple notice procedure and do not involve the same considerations as ‘ab initio transactions’ such as agreements to lease. Those considerations include the presumption that the parties do not intend to be bound unless and until all the important terms are committed to writing and a contract is signed. To the contrary, in the case of renewals, the contractual framework and key terms have already been agreed (as set out in the lease) and it is just a matter of whether the lease on existing terms is to be renewed. It was also noted that, commonly, parties operate on the basis of a notice of renewal without any contractual documentation or formal deed of renewal being signed. This was relevant in considering the Consultant’s ostensible authority i.e. one might expect certain ab initio transactions, such as agreements to lease, be documented by full contracts but there are different expectations in relation to the less formal process of renewal.

In light of the course of dealings as noted above, the Court considered it reasonable for the landlord to have assumed that, if the Consultant had authority to negotiate the renewal of lease, he would also have authority to bind the Ministry to the final agreement.

Having established that the Consultant did have ostensible authority (albeit not actual authority) to both negotiate and sign a formal renewal of lease contract, the Court turned to the question whether the parties had in fact reached a binding agreement.

Was there an agreement to renew the lease?

The Court noted that the renewal mechanism in the lease, which simply required the tenant to give the landlord written notice to renew the lease, did not require a formal deed of renewal. It also took into account that there is a degree of informality about the renewal process in commercial practice.

However, in this case, the Ministry did not follow the straightforward renewal procedure set out in the lease. Instead it proposed a renewal on terms: it was only willing to renew the lease if the landlord agreed to carry out certain works on the building. Contractually, this was an offer to vary the lease and therefore the ordinary principles applying to contract formation applied.

The Judge did not consider that the Consultant’s letter of 9 May 2009 (in which he acknowledged the landlord’s countersigned letter and asked the landlord to forward a variation of lease) represented a concluded contract. It is one thing for parties to reach agreement on all the relevant terms of an agreement, but another to reach agreement that they are bound. Although the Consultant’s letter of 9 May 2009 referred to there being an ‘agreed basis’ for the Ministry ‘exercising its right of renewal’, it also made it clear that there were still further steps required being the preparation and execution of a variation of lease. This indicated that the exercise of the renewal was to happen in the future. There was therefore no present concluded contract renewing the lease. There was an agreement reached as to the terms but the preparation and execution of a deed was still required.

The Court also looked at the subsequent actions of the parties and found no evidence of actions being carried out consistent with new terms (such as the new agreed rent being paid or demanded).

Points to note

Property consultants, or other agents acting on behalf of a party, should express negotiations as subject to ratification by their principal if they do not have actual authority to bind it to negotiations (or otherwise make it clear that the negotiations are not intended to be binding unless and until formal documentation is signed).

Beware that there is a legal presumption that parties do not intend to be bound by commercial negotiations until formal documentation is prepared and signed. If, as is often the case, the parties do intend to have reached a binding agreement at an earlier point (and that formal documentation is merely the record of agreement already reached) ensure there is clear written evidence of a mutual intention in this regard.

Finally, watch for renewal procedures morphing into variations of lease. Whilst a renewal can usually be activated by a simple notice procedure, if a tenant intends to renew only if certain terms are agreed by the landlord, then this may amount to a variation of the lease which will need to satisfy certain contractual and statutory requirements in order to be enforceable.

Michelle Hill is a Senior Associate of Kensington Swan specialising in commercial property.